Analysis of Corporate Administration and The Management of Potential Risk in an Enterprise

Corporate Governance

Executive Summary

Corporate governance provides an organization with specific rules to be followed to ensure best practices. Mitchells & Butlers is a company that carefully observes the UK Corporate Governance Code in its operations, which is observed by the top management that consists of the Board of Directors. The company also have adequate measures for risk management. Risk management helps the company in identifying risks and coming up with appropriate mitigation activities before it affects the daily operations of the company.

Introduction

Corporate governance involves the system of practices, processes, and rules through which a company is controlled and directed. One of the primary roles for Mitchells & Butlers Board of Directors is providing leadership for over 44,000 employees and maintaining the highest corporate governance standards (Bowers, 2012, p.1). The Board of Directors has been stable since Phil Urban joined the company as the Chief Operating Officer at the beginning of 2015. Urban was the one to replace Alistair Darby, the Chief Executive as he resigned and stepped down from Mitchells & Butlers. Urban has shown without any doubt that he can make a good Chief Executive due to his record of the operational delivery. Mitchells & Butlers operate in line with the best practice recommendations of UK Corporate Governance Code that facilitated the review of Board’s effectiveness in corporate governance. Risk management involves the identification, prioritization, and assessment of the risks. At Mitchells & Butlers Company the risk is first identified. Then the assessment of its likelihood and impact follows slightly followed by agreeing on the risk mitigation plans of the gross risk. Then reviewing of net risk post mitigation occurs. The final step of risk management is reporting the risk assessments to the risk committee and the audit committee. This essay will focus on the risk management and corporate governance at the Mitchells and Butlers Company.

Corporate Governance

Corporate governance entails some responsibilities to be played by the Board of Directors, which are in respect to the Mitchells & Butlers. There exist five primary roles that are played by the Board and which contributes significantly to corporate governance. The first one involves to determine the commercial strategy and overall business. The second is identifying the long-term objectives of the company. The third one is reviewing the financial plans and operating budget and carefully monitoring the performance in relations to the plans. The fourth one is to determine the basis in which capital is allocated (Mitchells & Butlers plc, 2015, p.46). The last but not least is to consider all the policy matters that relates to Mitchells & Butlers activities, which includes any major policy change. Even the corporate governance statement clearly shows that Mitchells & Butlers Group complies with the UK Corporate Governance Code. It is the primary role of the Board to ensure that all the activities of Mitchells & Butlers together with its various businesses are often conducted in compliance with the law, good practices, regulatory rules, and requirements, ethically and with proper and appropriate governance and standards. This entails reviewing the internal controls and ensuring that an appropriate balance of experience and skills represented by the Board comply with the UK Corporate Governance Code. Also, the relationship between the company and the shareholders should always be maintained.

According to the Chairman of the Mitchells & Butlers, Bob Ivell, the Board is committed to offering high standards of the corporate governance. The Board composition and the Board committee constitution are among the best provisions and practice guidance offered by the Code. For example, in the year 2015 the appointment of the Senior Independent Director, Stewart Gilliland showed non-compliance with the Code. Also, considered in the corporate governance are the Nomination Committee Report and the Audit Committee report. The Mitchells & Butlers Board mainly recognizes the significant of a good corporate governance especially in creating a successful, profitable, and sustainable business where the details are laid well in the form of procedures and principle application of the corporate governance (Coatsworth, 2013, p.1). The fundamental part of the Code is that it consists of the best practice recommendations that relate to the corporate governance and yet acknowledges the individual cases. The members of the Board in the year 2015 constituted nine directors. The Board forms the top management of the Mitchells & Butlers Group and is responsible for all the stakeholders, which includes the shareholders. The Board is the one that approves that annual capital, revenue budgets, and strategic plans. It also performs a significant review of the investment proposals and performance of the past investments where they maintain an overview. The Board monitors the overall internal control system, compliance, and governance and it ensures that necessary technical, human resources, and financial resources are put in place to meet all its objectives. Particularly in the field of human resources planning, hiring, selection, recruitment, training and development must be done. In the process of hiring and placement, the best employees are picked who are then interviewed and the qualified selected. The human resource management ensures that the employees that they select are the best who are then entitled to training and development to make them fit into their roles. This makes the employees adhere to various rules and regulations laid down by the Corporate Governance Code since they understand them clearly.

In the financial year 2015, there was eleven Board meetings that were scheduled to happen. The Audit Committee had four meetings, and the Remuneration Committee had four meetings as well. The Nomination Committee was entitled to two meetings only. These meetings are important since the discussion made is a further follow-up of the best practices that are compliance with the Code. The attendance level was good, which means that a majority of the leaders values the importance of the Code in the operation of Mitchells & Butlers. If a director was not able in attending a particular meeting, it is a must that they should be provided with all the necessary information and papers. If there were some issues that the director wanted to discuss, they are allowed to present them to the Board of Chair. The Board members are also meeting informally for about five times annually where the Non-Executive Directors in the absence of Executive Directors meet twice annually (Ellson, 2013, p.1). The company secretary has some responsibilities among them being ensuring a good flow of information between the senior management and the Non-Executive Directors in the Board. Through the consent given by the chairman, the secretary advises in all the corporate governance matters and assists the directors with professional development. The kind of assistance given involves business updates, provision of external courses, and visits to the operational site. It is also the duty of the company secretary to induct the newly appointed directors to the Board where they are given guidance on the requirements needed in connection with the duties complying with the Code together with the Companies Act of 2006. To give room for others, all the Mitchells & Butlers directors are needed to stand for the annual re-election at the Annual General Meeting and must be done in accordance with the Articles of Association of the company. The division of roles between the Chief Executive and Chairman is clearly established and set out in writing by the Board.

The chairman of Mitchells & Butlers upon appointment must meet the independence criteria provided on B.1.1. of the Code, which Bob Ivell met. Before Ivell became the chairman, he had served as the company’s Chief Executive and Non-Executive Chairman. As defined by the Code, the primary purpose of the chairman is to ensure that there is effective and appropriate communication between the company and the shareholders. The chairman also ensures that all the directors are well informed by the company secretary pertaining the roles that they should play. The Chief Executive has the duty of implementing the strategies agreed by the Board and the executive management. The Senior Independent Director mainly supports the Company Chairman in the delivery of the objectives by the Board and ensures that the main views of stakeholders and shareholders are conveyed. The directors are regularly trained as need arises at any time of the year and they also have an annual training. This means that their skills and experiences are boosted and they are updated concerning the current business trends and compliance with the Code, which is a priority for Mitchells & Butlers.

Mitchells & Butlers recognizes the importance of diversity and acknowledges it in the operation. The company pays respect to diversity of background, skills, industry experience, gender, international experience, and knowledge. The Board ensures that merit is done at individual competence, expertise, and skills. The Board also ensures that the directors are sufficiently experienced and that they have independent character and judgment. The Nomination Committee agree measurable objectives for the achievement of diversity in compliance with the UK Corporate Governance Code provided under B.2.4. Where Mitchells & Butlers fails to comply with the Code, they ensure that they review that part until it complies. For example, in the year 2015, Mitchells & Butlers did not comply with B.2.1 of the Code since the Nomination Committee did not comprise of a majority of the independent Non-Executive Directors (Gerrard, 2010, p.1). The Mitchells & Butlers code of ethics is well implemented with clear guidelines that describe the standards of the behavior that are expected of all those employees working in the company. The employees are required to comply with the Code and the Bribery Act 2010. There should be a difference in professional and personal relationships among employees. The hospitality that employees offer to the suppliers ought to be approved in advance by the appropriate senior management. The training offered to the directors includes social, governance, and environmental matters. The financial records must be presented with accordance to International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Practice in UK. The primary role of Audit Committee is reviewing and maintaining the oversight of the Mitchells & Butlers corporate governance. This is particularly with respect to internal control, risk management, and financial reporting.

Risk Management

In Mitchells & Butlers, there are five steps that are involved in risk management. The first step involves risk identification. Then the assessment of its likelihood and impact follows. In this step, the effects of the risk and likelihood of it occurring are measured in the risk identified. Then what follows is agreeing on the risk mitigation plans of the gross risk. This involves brainstorming at all the possible risk mitigation measures that should be taken to solve the risk (Mitchells & Butlers plc, 2014, p.38). The most appropriate risk mitigation measures are the one applied for managing that particular risk. Then reviewing of net risk post mitigation occurs. This means that every mitigation measures has its consequences. It is at this step that the net risk consequences are weighed down. The final step of risk management is reporting the risk assessments to the risk committee and the audit committee. The risk assessments are reported to the audit committee and risk committee so that they can take the respective action.

Mitchells & Butlers face the marketing risks, which they have already identified that would affect the long-term sales of the company. The demographic and social goals are mainly driving long-term growth leading to the steady decline of on-trade drinks sales without food. These changes combined with the developments in the consumer taste might reduce the appeal of Mitchells & Butlers brands, especially to its guests. Hence, Mitchells & Butlers is required to respond to such changes promptly and adequately. To mitigate the market risks the company conducted a consumer research by interviewing about 8,000 consumers and about 14,000 leisure occasions (Holmes and Ahmed, 2009, p.1). The research managed to examine the consumer dynamics, macroeconomic trends, internal and competitor brand positioning, and strengths and weaknesses. From the research, the company identified some implementations that were to be done to ensure that the portfolio continues to be relevant for its guests. Mitchells & Butlers Company mainly uses an online guest satisfaction survey that collects the feedback from the guest. The guest’s feedback together with the results obtained from the various research studies are regularly evaluated and monitored by a certain dedicated group, which ensures that relevance to the guest is observed and maintained since it is a major priority of the company. The company’s net promoter has improved from 59% in the year 2013 to 63% in the year 2014. What makes Mitchells & Butlers to remain relevant to its guest is that they ensure that the consumer’s opinions are highly valued and that modifications of the existing products are done to fit the customer’s requirements. When the consumers are involved in the decision-making process, the products and services provided to them require no or less modification once produced.

The risk management in pricing and market changes is important since these changes would have adverse impacts on the spending patterns of the consumers. This also may affect the competitive advantage that a company has in the industry. Hence, these kinds of risks may affect the profitability and company’s revenue, which would finally have impacts on the value of assets of the company. This risk of pricing is solved by the company focusing on the long-term potential of the market. We have seen that Mitchells & Butlers have a site that extends various offers to different groups in the UK. The company targets different consumer groups and the leisure occasions. This wide range of the consumer often allows Mitchells & Butlers to appropriately respond to the changes in the consumer expenditure by either substituting a particular brand in a certain location or flexing the offers. The company has Sales and Margin Managers and Asset Planning groups that are responsible for evaluating and analyzing the information gained from the site and with respect to other competitors. Then the company comes up with good offers in various location, which gains it the competitive advantage.

The operational risks are experienced when the cost of goods and services increases. The rise in the price of products for utilities and resale costs due to increases in the global demand and the uncertainty of supply. The producing countries may have a significant effect on the cost base that consequently affects the margins. Mitchells & Butlers have various activities for mitigating the above operational risks. The company leverages its scale in order to drive the competitive cost merit and highly collaborates with the suppliers so that it increases the efficiencies in the chain of supply. The food supply fragmented nature in the globe commodity markets allows the company to source products from various alternative suppliers, which help them to reduce the cost (McKenna, 2010, p.1). In addition, Mitchells & Butlers evolves the composition of retail prices and menus to optimize the value to its guest as well the profits for the company. Therefore, the company decides where to source the products depending on the price that will enable them offer competitive profits and get a reasonable profit margin. Also, as a measure taken by the company they have energy procurement strategy. The strategy is for reducing the risk of cost increment and the uncertainty on energy prices. The strategy sets a program of medium and short-term purchases that are against forecast requirements. The dedicated management team in energy is responsible for optimizing energy across the organization mainly by promoting the energy efficient practices. This teams offers educational and training programs to the members of the staffs and installs energy efficient equipment that promotes energy saving in the daily operation of the company.

Risk management in individuals planning and development is provided for Mitchells & Butlers. As we have seen, the company has a strong focus on its guest and the important values of the company involves retaining, attracting, motivating, and developing the best people who have the right capabilities in the organization. To mitigate the risk in planning and development, Mitchells & Butlers makes great investment in the field of training in order to ensure that its employees have the required skills of performing their duties successfully and with much ease. Furthermore, a survey of the employee is often conducted every year, which establishes the workers satisfaction and engagement, which is later compared with that of other companies. Where it deems appropriate the changes in the working practices are usually made in response to the findings provided by the surveys. The remuneration packages ensure that a talent review process is used for the company to remain competitive. This means that Mitchells & Butlers observes surveys in making relevant changes. This is an appropriate way of solving the risks since the consumers will always provide better feedback that will help the company to continue being competitive and continue attracting more guests through referrals. The staff turnover for the company has remained very low at a percentage of about 78% since the year 2013 (Jones, Comfort, and Hillier, 2006, p.342). The risk management in business continuity and the crisis management is valued by the company. Mitchells & Butlers heavily relies on the food and drink supply chain together with its IT systems for serving its guests effectively and efficiently. Interruption of the supply chain, terrorist activity, the threat of disease epidemic, and failure or crisis of the IT systems may restrict sales or even reduce the company operational effectiveness. The mitigation activities that the company has taken is to ensure that the continuity plans and the IT systems are refreshed regularly and tested to avoid failure. The Retail Support Center was tested in September 2014 that ensured that in the case, of a disaster the critical business systems mainly functions normally. This means that in case the a system failure is experienced in the company there are some vital backup facility put in place, which ensures that the critical services are still offered to the customers awaiting for the main system to recover from the errors. The back-up is very important since the data is stored that is then retrieved and saved to the functioning system once it recovers. Hence, the employees work without fear of system failure since they know that once the system resumes no manual work is done, but it just continue functioning as usual.

The risk management in the finance field is done with more forecasting to ensure that the company has money to keep it running even during times of crisis. There may be risks of borrowing covenants, which may result due to change in economic climate and which lead to reduced cash inflows. Also, this kind of risk may result when there is a material change in valuation of the property portfolio. The mitigation activities are performed by the finance team. This team conducts cash forecasting every day with the periodic reviews at Treasury Committee. They adhere to the Board Treasury Policy by monitoring the company’s operations and agreeing upon the appropriate strategies that are recommended to the company’s Board. Furthermore, to be on the safer side, regular testing and forecasting of the compliance to the covenant is done and there is frequent communication that is maintained with Securitization Trustee. This means that once a crisis is forecasted, the company prepares money in advance to avoid rushing in the final minute, which may force the company enter into a borrowing covenant to enable the company to keep operating. The pension fund deficit usually remains as a risk though Mitchells & Butlers has made great contributions in order to reduce it.

The regulatory risk management focuses on the failure of operating legally and safely. A primary safety and health failure would lead to injury, loss of lie, significant loss, and illness, which may destroy the company’s brand reputation. Mitchells & Butlers often maintains a very robust program of safety and health checks both in its pubs and restaurants and also throughout its supply chain. The company has a dedicated Safety Assurance team that uses technical partners who include microbiologists, allergen specialists, and food technologists to ensure that the food procedures are safe and produce healthy food for their guests (Scuffham and Davey, 2012, p.1). There are regular independent audits, which are performed in order to ensure that procedures are strictly followed and that the appropriate standards are usually maintained. The suppliers of the food are required to meet British Retail Consortium of the Global Standard for the Food Safety and that they are regular to quality and safety audits. Also, Mitchells & Butlers has a comprehensive safety and health training programs that are kept in place to avoid any regulatory risk, which may arise. Mitchells & Butlers follows the five steps of risk management and ensures that the risk is first identified. The company takes precautionary measures and mitigation activities to prevent the risks before it occurs. This means that the risks are managed even before being encountered, which helps to continue the process of production and offering services as usual.

Recommendations

The corporate governance of Mitchells & Butlers is carried out in the right manner where rules and regulations are observed and best practices exercised. The company works in response to the UK Corporate Governance Code. In some cases, where the company shows non-compliance with the Code, they keep reviewing it until they ensure that they follow it closely. For example, in the year 2014 when the Nomination Committee constituted nine members, they did not comply with the Code. The next year they added some members to become eleven where it complied with the Code. However, in corporate governance, I would recommend for Mitchells & Butlers to involve training and development of the junior employees. This is because it put more emphasis on training and development programs for directors forgetting the junior employees who may feel left out. I would also recommend for the company to have a department that checks compliance with the Code and punishes the ones responsible for non-compliance to avoid such cases. The Board should not be given the role of checking compliance with the Code, but it should first focus on the primary objectives laid down by the company. Also, in risk management, Mitchells & Butlers does well since it takes the precautionary measures and mitigate risks early before it affects the daily operations. However, the company has failed in pension fund deficit, which is a risk experienced even today. I would recommend for the company to come up with a strategy and open an account where they should use the funds for settling such deficit. The company should in future ensures that pension funds are not used for other activities to avoid increasing the already available deficit.